If you’re a new business owner, qualifying for a conventional business loan may be difficult. An alternative is to use a personal loan for business purposes. Unless your lender has restrictions on how the loan can be used, you can use the funds to cover any costs.

However, you may pay higher interest rates and get a lower loan amount with a personal loan compared to business financing. Additionally, when you take out a personal loan, it won’t benefit your business credit score.

What Are Personal Loans for Business?

A personal loan for business is money you borrow from a financial institution for business expenses. Personal loans are unsecured, so you won’t need to offer collateral. You’ll repay the loan in fixed monthly payments over the course of a few months or years.

An important distinction is that a personal loan will be issued to you, not your business. This means you’ll use your personal finances and credit to secure the loan. Business loans are issued to your business, so if you’re unable to repay the business debt, it won’t impact your personal credit score.

Why Use a Personal Loan for Business?

There are several reasons why you may choose to use a personal loan for business. Here are the top benefits of using a personal loan to start or expand your business.

Flexibility in Use

If your lender doesn’t pose any restrictions on the use of loan funds, you can use the money for your business needs. Personal loans can be used to purchase inventory, equipment, and supplies. You can use the funds for working capital or boost your marketing efforts.

Easier Approval Process

If your business is new, you may not be able to qualify for many loan options, such as C&I loans, business lines of credit, or SBA loans. You’ll need to demonstrate history and time in business and provide proof of business revenue to qualify.

Personal loan eligibility requirements are less stringent and based on your income and creditworthiness. Personal loans offer an easy application process and fast funding, and you’ll typically get funds in your bank account in one business day. Many lenders offer loans to borrowers with bad credit, so you may be able to get approved even if you’re unable to qualify with credit unions or traditional banks.  

No Collateral Required

Personal loans for business are generally unsecured, so you won’t need to provide collateral. If you’re a small business owner, this type of loan is more accessible compared to many products that may require you to have a vehicle or equipment to use as collateral.

“Because personal loans for business do not typically require collateral to secure the loan’s repayment, this is a popular choice by new business owners to fund the start-up of their newly-formed business,” explains Brad Reichert, founder and managing director of Reichert Asset Management LLC. “With this initial capital, they can buy wholesale inventory, equipment, and other assets to get started making the product(s) they will sell,” he says.

“Personal loans are often preferred by businesses that provide professional services, more so than those that produce a tangible product for sale,” Reichert adds. For example, because their work involves more of the brain power used for consulting or the labor performed by employees, businesses that provide professional services will not usually have much property, inventory, or equipment that may be collateralized as security for a conventional business loan,” says Reichert.

What Are the Risks of Using a Personal Loan for Business?

While there are many benefits of personal loans for business, there are also a few risks involved that you should be aware of. Personal loan interest payments aren’t tax deductible like a business loan. There may be an exception if you use the entire loan amount for business expenses.

If you fail to repay the loan, your personal credit will be damaged. This will make it harder for you to access affordable credit in the future. If you take out a secured loan, the asset you used as collateral can be foreclosed.  

Personal loans also have smaller loan sizes compared to business loans. The repayment terms are also shorter, so it’s best to consider other options if you need a longer repayment. For example, SBA loans offer repayment terms of 10 to 25 years.

Who Offers Personal Loans for Business Use?

Several lenders offer personal loans for business use. Here’s a list of lenders offering the best personal loans based on the APR, credit score requirements, and loan amounts:

1. SoFi Personal Loan

Loan Amount: $5,000- $100,000

APR: 8.99%-25.81%

Minimum Credit Score: None

2. Upgrade

Loan Amount: $1,000- $50,000

APR: 8.49%-35.99%

Minimum Credit Score: 560

3. LendingClub

Loan Amount: $1,000- $40,000

APR: 9.57%-35.99%

Minimum Credit Score: 600

4. Best Egg

Loan Amount: $2,000- $50,000

APR: 8.99%-35.99%

Minimum Credit Score: 600

5. Upstart

Loan Amount: $1,000- $50,000

APR: 4.60%-35.99%

Minimum Credit Score: None

When trying to find financial institutions or lenders offering business personal loans, here are a few tips to follow.

Researching Online

Use search engines and online resources to find lenders that specialize in personal loans. Many online lenders may also let you pre-qualify for personal loans before sending a loan application. This will allow you to see potential loan amounts and terms you qualify for. Consider pre-qualifying with multiple lenders so you can find the most competitive rate.

Seeking Recommendations

Ask friends or family members for recommendations if they’ve taken out a personal loan in the past. If you know other business owners, talk to them about where to find personal loans for business purposes. They may also be able to provide you with guidance about alternative lending options they may have used.

Consulting With Financial Advisors

It’s also a good idea to consult with a financial or loan advisor about finding suitable lenders. Financial advisors can review your personal details and need to provide tailored recommendations about the best loan products.

Personal Loans vs Business Loans

It’s important to understand the key differences between the two to determine whether you should apply for a business or personal loan. Business loans are specifically issued to businesses, while personal loans are issued to individuals.

Business loans are harder to qualify for and may require you to provide documents such as balance sheets, accounts receivable reports, business plans, cash flow, and collateral. Lenders usually look at your credit history, income, and debt-to-income ratio with personal loans.

Business loans offer larger loan amounts, lower interest rates, and longer terms, and the interest is tax-deductible, but you may have to provide a personal guarantee. Personal loans are easier to qualify for, but you’ll be putting your personal credit at risk if you fail to repay.

What To Look for When Choosing a Personal Loan

Borrowers need to shop around and compare their loan offers to get the lowest rates on personal loans. Here are a few things you should look for.

Reviewing Interest Rates

Interest rates on personal loans can vary widely based on lenders. Make sure to pre-qualify with multiple lenders so you can review and compare the annual percentage rate (APR). APR includes interest rates as well as charges like origination fees, so it’s better to use APRs when comparing different lenders instead of interest rates. Interest rates will be lower if you have excellent credit.

Evaluating Loan Terms and Repayment Options

It’s also a good practice to evaluate repayment options and loan terms to ensure they align with your personal needs. Longer loan terms can lower your monthly payments so they can be more affordable. However, you’ll also end up paying more in interest over the life of the loan. Choose a loan term that is affordable while being the least expensive.

The Bottom Line on Personal Loans for Business

Although getting a business loan for your financial obligations is ideal, that isn’t an option for newer or small businesses. Personal loans for business may prove to be a good alternative, though the loan amounts are smaller and interest rates are higher. Be sure to explore all business funding options available before you take out a personal loan.